US embassy cable - 05CARACAS1431

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001431 
 
SIPDIS 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
TOKYO FOR SFLATT 
 
E.O. 12958: DECL: 05/02/2015 
TAGS: EPET, VE 
SUBJECT: VENEZUELA:  A SHORT PRIMER ON OIL SECTOR CORRUPTION 
 
Classified By: ECONOMIC COUNSELOR RICHARD SANDERS, FOR REASONS 1.4 (d) 
 
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SUMMARY 
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1. (C) Several different corruption scandals are brewing in 
Venezuela's oil sector.  In PDVSA's western operational area, 
the scandals range from allegations about garden variety 
contracting corruption to questions about the procedures 
following in the hiring of thousands of employees who were 
hired through privately owned personnel services ("body 
shops").  Energy Minister/PDVSA President Rafael Ramirez__ has 
himself told the press that investigations into corruption in 
western Venezuela are likely to spread to other PDVSA 
operations.  Allegations have also re-surfaced relating to 
the operations of PDVSA's trading department which has 
reportedly been using intermediaries to place oil exports. 
Finally, allegations relating to CITGO have, according to one 
Caracas source, led the PDVSA Board to consider the buy back 
of all CITGO bonds to avoid future SEC reporting 
requirements.  These allegations provided a backdrop in the 
week of May 2 to rumors that Venezuela's oil production had 
fallen.  Chavez and other senior GOV officials publicly 
blamed the alleged production shortfall and other problems in 
PDVSA on CIA penetration.  In these circumstances, it is 
unlikely the GOV will actually investigate a number of these 
issues.  In fact, the GOV is most likely to take steps such 
as the reported proposal to re-purchase CITGO debt out of 
fear that the U.S. Government will start to turn over rocks. 
End Summary. 
 
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WESTERN VENEZUELA 
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2. (U) About 40 people were fired in PDVSA's western division 
early this year (a number of whom have been re-hired).  These 
firings were reportedly linked to such activities on the 
employees' part as graft in the award of contracts.  However, 
in a press interview on April 24, Energy Minister/PDVSA 
President Rafael Ramirez__ said that PDVSA would investigate 
corruption charges against dozens of other managers of the 
company's operations in the west of the country.  Ramirez__ 
also said the investigation of corruption could spread to the 
eastern operational division and other PDVSA-controlled 
activities. 
 
3. (C) Joe Wright, the head of ChevronTexaco's operations in 
Western Venezuela, informed econoff May 3 that faced with 
hiring difficulties in 2003, PDVSA had turned to privately 
owned personnel services known as "body shops" to staff its 
operations.  Saying that ChevronTexaco itself has used such 
operations, Wright noted that they do the work of culling 
through applications and provide administrative support for 
the employees they locate.  Most of the PDVSA employees thus 
located would have been technicians or clerks.  The rumor in 
the west, said Wright, is that there was "graft and 
corruption" on the part of the companies involved in 
providing the employees to PDVSA and that PDVSA managers were 
involved.  Many of the contracts expired at the end of April. 
 Thus the rumor of massive firings of employees contracted 
through this mechanism that emerged in major Venezuelan 
newspapers at the beginning of May. 
 
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TRADING FOLLIES 
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4. (U) On April 11 and 12, Miami's "Nuevo Herald" published 
two stories describing the "consulting fees" that 
intermediaries are receiving for placing oil exports.  These 
articles followed reporting in Caracas daily "Tal Cual" in 
March which described at length the failure of PDVSA's 
trading department, under the leadership of President 
Chavez,s cousin Asdrubal Chavez, to control corrupt trades. 
Allegations about corruption associated with PDVSA's trading 
department have been rife since the handling of the gasoline 
sales during the December 2002-February 2003 strike. 
 
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CITGO 
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5. (C) Allegations have also surfaced about the management of 
CITGO.  In 2004, Luis Marin, a hero of Chavez's revolution 
after he assumed control of PDVSA's eastern operations during 
the strike, was appointed as the President of CITGO.  Marin 
organized the move of CITGO's headquarters from Tulsa to 
Houston.  This move has provided the backdrop to numerous 
allegations, including that Marin headed a group that 
purchased the location of CITGO's future Houston offices and 
then leased the space back to the company at an inflated 
rate.  Other allegations have ranged from the misuse of 
company aircraft to a $30,000 CITGO donation to an exclusive 
Houston private school attended by a company Director. 
Although Marin was once believed to be bound for an OPEC job, 
he has been fired and is under investigation ) if only by 
some members of the National Assembly.  In his effort to save 
his job (and, perhaps, CITGO as a Venezuelan-owned entity), 
Marin told the press that CITGO had in fact been a very good 
business for Venezuela because the company had spent as much 
as $200 million in 2004 on purchases of PDVSA crude that were 
priced over market prices. 
 
6. (C) Representatives of the Venezuelan National Assembly 
traveled to Houston in March to gather information on the 
situation in CITGO.  A Caracas source who recently met with 
one of the deputies who visited Houston told econoff May 2 
that the deputy had been surprised by the number of new 
allegations he had received via anonymous letters delivered 
to his hotel room.  In response to a question about the 
status of the National Assembly inquiry, our source responded 
that it has been stalled by members of Chavez's Fifth 
Republic Movement (MVR).  He added that he had been informed 
that a proposal had been submitted for the consideration of 
the PDVSA Board the week of April 25 to buy back all CITGO 
bonds so that CITGO would not be faced with future reporting 
requirements to the SEC.  The PDVSA Board, he said, was 
&running scared.8 
 
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ITS ALL THE CIA'S FAULT 
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7. (C) These allegations provided a backdrop in the week of 
May 2 to rumors that Venezuela's oil production had fallen. 
Despite the fact that President Chavez said publicly for the 
first time that western Venezuelan production is 100,000 b/d 
below what it "should be," by week's end Rafael Ramirez__ had 
said once again that Venezuela's production is 3.3 million 
b/d.  Chavez and other senior GOV officials publicly blamed 
the alleged production shortfall and other problems in PDVSA 
on CIA penetration.  Sources who have recently visited PDVSA 
installations report the increased presence of the National 
Guard as well as prominantly placed posters warning about the 
CIA and saboteurs. 
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COMMENT 
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8. (C) Although allegations of corruption in PDVSA's 
operations have been a staple of the Caracas rumor mill for 
the past two years, the seriousness of the current 
allegations is notable.  It is also notable that so many 
different issues have popped into the public view.  The 
public comments about Venezuela's production levels have also 
served to increase the profile of the various corruption 
charges.  At the end of the day, however, it is unlikely that 
the GOV will actually investigate a number of these issues. 
In fact, the GOV is most likely to take steps such as the 
reported proposal to re-purchase CITGO debt out of fear that 
the U.S. Government will start to turn over rocks. 
Brownfield